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I’ve once again fallen behind providing updates on my trading, but events that occurred this week provided my most significant milestone to date.

When it comes to investments and trading, my main tool of the trade is chart analysis, that is analyzing price and volume movements over time as an indicator of future market moves. As prices tend to be pretty volatile and jumpy, trying to see the order in the seeming chaos is no easy task. Like looking at cloud formations, it’s easy to see what you “want” to see rather than what is actually happening.

So my focus over the months and years was to develop a system approach to interpreting prices moves, which are a collection of reactions of support (buying) and resistance (selling).

Going back in time to my banner year in 2012, I had a great intuitive feel for market price movement using trendline analysis, but over time lost that intuitive focus the following year. This is the problem with just using intuition or gut instincts- they come from the sub conscious and as such can be elusive to hold on to since you can’t evaluate on a conscious level. One is basically doing things without knowing the details of how and why certain actions are taking place. My focus then shifted into making that intuitive subconscious knowledge into conscious knowledge.

Last year I made a big discovery that helped me lock in some conscious mapping of resistance and support price action and improved trendline drawing and analysis. This helped immensely with helping to refine my system to make it a better predictor of future price action. My last posted performance results were the fruit of that work.

Despite the major progress, there was still one significant problem- while I had developed a system of chart trendline analysis to predict moves, I couldn’t explain the action it was doing. I could tell where the price was going to go by chart constructs, buy it didn’t make sense to me logically. So I would place trades that my analysis told me would succeed, but I felt would fail, because the movement didn’t “look” right. The trades succeeded, but that disconnect between my trendline analysis and intuition eventually led to problems and my search for more clarity.

More grind work and chart analysis R&D ensued with a healthy amount of trial and error over the next several weeks which culminated in yet a new breakthrough discovery this week.

The discovery came as I was analyzing my failed trades after market – which is where most of my big breakthroughs occur. I realized that my assumptions made for constructing trendlines were not all correct. In some cases the rules of behavior I had made were incorrect. In other cases, the rules were correct, but my application of them was off.

I did some recalibrating, refining, and adjusting of my trendlines and price behavior assumptions when a new level of enlightenment started seeping in. I was now able to do chart analysis that perfectly captured price moves based on support and resistance. The key difference with this new modified analysis was that I now understood the market movement and there was no longer a disconnect between my intuition and analysis.

I could now look back on the market moves of 2012 and understand the behavior by both intuition and reason, which is what I did when I tested my new understanding on past years data to verify consistency.

Long story short, I’m as about as close to achieving the holy grail of creating a system of both high precision and high probability trades as I think I will get.

Now as usual, I write this ahead of fully implementing my system as this discovery is hot off the press. I also know that seasoned traders would take what I said with a grain of salt as we’ve all heard bold claims before on trading forums that came up short. Performance results going forward will show the reality. But I’m stating my discovery and assessment now because that’s how confident I am based on back testing and preliminary results.

Split the week between fine tuning what I learned from my errors last week using a sim account and following through with trying it on the real account.

A sim account is ideal for testing specific details of system methods without getting sidetracked/distracted by profit/loss. Actually, they are now pretty much identical to real accounts so those interested in testing the trading waters should definitely begin on a sim for risk free trade experimentation.

As I was working out my methods this week, it occurred to me how similar my techniques are today compared to what I was doing in the past when I was earlier on in this journey. I didn’t realize how close I was to locking down accuracy, but unfortunately, “close” wasn’t good enough. There were a few techniques I was using that I wasn’t applying it the proper way, and the outcome was mixed results. Sometimes the methods would work, and other times, not- and that inconsistency led me to move on to trying other things….not realizing how close I was to getting it right. The nuances of determining how to place a trendline can be so subtle but also make or break. Interpreting the meaning of price reactions at trendlines falls into the same category as well.

On the other hand, although I had several “separate” methods close to figured out, I was no where near knowing how to put them all together in a unifying theory. That had to come with time, trial and error and some serendipity thrown in.

This is why it’s important to take good notes of one’s progress and market system updates. It’s critical for keeping track of what you are doing and the effectiveness of one’s current methods. That makes it easier to experiment and make changes, but also be able to fall back if you wind up too far off course and need to back track.

One full trading week left for February, and I plan on making the most of it.

Making steady progress in coming up to speed on my modified trading methods. The more I use it the more I realize it’s the real deal for me. Any trading mistake I make is no longer system related- meaning that the error comes from me failing to properly apply the system.

When properly used, the system provides excellent entries and exit targets with no fear of getting stopped out via whipsaws. As I grow more familiar with it I get a greater awareness of just how accurate it is. Am I excited about this? You bet! I’ve reached the phase where I have made a working and tested system and all that remains is getting proficient, which is happening daily.

I say these things knowing any experienced traders reading this may think “Many traders have claimed they had a ‘working’ system, only to have it not perform as stated.” If I were reading this blog as a stranger, I’d probably think exactly the same thing, haha. =) Fair enough, but time and performance results will prove me right or wrong.

I have to say though when you have a line on how the market is supposed to move, you really start seeing all the “fake” market moves that trick so many into making bad trades. It’s not like the market is just “random” and hard to figure – it’s actively moving in a way to entice you to make an error. I see the market dance around resistance and support lines to “fake” resistance or support, only to reverse and move in the other direction. Anyone trading on the fly without having a system to keep them grounded is bound to have problems getting accurate reads on market moves.

Here’s Friday’s ES Chart:

When the market opens, the market price moves all over the place with no clear direction. A notable bar is a 7am when prices spike up, reverse, spike down sharply, then jump back towards the center in a span of 2 minutes (candle bar timeframe). Very easy to get whipped out of a position with movement like that. On the other hand, there is a good amount of volatility that can produce good profits if properly traded. There’s almost 10 points difference between the high and low points of the day.

WordPress lets me know in big bold letters what my current post count is whenever I publish a blog. My last blog was #99 and this one is the Big 100! Of course I’ve published 100’s of posts on my Xanga Account, but Xanga never heralded stats to make me aware of the running count.

Since WordPress made me “aware” of my impending 100th post, I starting thinking that maybe I should include some major news or something else significant to mark the event- which explains the time gap between my last post and this one. I was waiting for something worthy to put down for the big 100.

First off, I have to say that I’m not a fan of the new editor format WordPress introduced. I got used to the old one and they moved things around, changed some naming conventions, and didn’t even give a warning or grace period for folks to check out the changes before the switch. As a result, I made my first big error yesterday where I lost an entire blog of edits because I didn’t press the “Update” button. I was looking for a “Save/Save Draft” button, but the new editor version doesn’t have one. Instead they have “Update”, but I missed the connection. What’s worse is that there are no “auto-saves” so you MUST press the “Update” button to save your work. 😡

Onward to “Trading Updates”, where these are some pretty significant milestone events to discuss.

My last trading update mentioned that I had finally tailored my trading system to a point where I felt I was rapidly closing in on consistent quality trading. Well, my system was accurate enough to allow me to make a ginormous discovery/realization- finding what I call “immutable action-reaction” chart patterns.

Okay, to bring everyone up to speed- technical analysis (TA) deals with analyzing chart data such as price and volume using mathematical or graphical tools in order to help forecast future price movement. It can be as simple as noting support and resistance levels to complicated math equations and algorithms run on computers generating buy or sell signals.

The biggest problem with technical analysis is that its accuracy is limited – sometimes it works, and other times it doesn’t, which lowers its reliability. This is why in the trading/investing world there are many advertisements for “sure fire” trading systems that all but guarantee success. Of course, common sense asks the question if these systems were so good, why would their owners be selling the plans as opposed to using them to make money?

The majority of traders dream of finding an accurate technical trading signal that would take all the work out of deciding when to be buying or selling. Well, this month I found something pretty close to that.

What I discovered is a market action-reaction that acts the same way with my TA set up. What I mean is if prices act a certain way to my set up, then the following reaction has a certain characteristic that also repeats. So if one sees the action, one now knows what the coming reaction will be. This is as close to a guaranteed forecast signal that I’ve seen.

I consider myself very fortunate to have made this discovery- I was going through the end of day charts and reworking my analysis to see what the best trades would have been when I made the connection. The movements are so subtle that it’s easy to miss, and I’ve seen the behavior numerous times over the years, but never made the connection until now. The market moves in so many twists and turns, looking for such a connection is like the proverbial needle in a haystack. Without the right TA set up, I would never have noticed it.

This is a huge discovery in many ways. First, it’s a near guaranteed trading signal. Next, it serves as a reference point when making system adjustments. Normally, adjusting a trading system is difficult because you never know if any adjustment you make will break another part of your system. By having a known action/reaction, all adjustments can be made using that result as a constraint. It also works over many time frames so it can easily be used for longer term investing.

The discovery is pretty new so I’m still working on incorporating it into my system. I thought about waiting until I was using it and generating a stream of profits for confirmation, but that might take a few more weeks and didn’t want to keep from blogging about events that long. This is where I write about my journey of day trading proficiency and this is something worth writing about! =)

The next few weeks will tell that tale of whether I know what I’m talking about or if I’m suffering from delusions. 😉

After what seems like endless days and nights of system tweaking, testing, analyzing, and modifications, I believe I’ve finally assembled and configured the necessary ingredients for greatly improved trading accuracy in determining entries and target price, while also minimizing the set risk in the form of narrow stops.

System checks out with old and new data and different timeframes. The funny thing is it’s not like I’ve made a new discovery of some brand new method or technique. It’s basically me doing what I’ve normally done for the last few years, but I had to redefine what certain actions/reactions meant from what I originally thought.

The key now is getting more familiar with applying it in real time, which is my current focus.

I feel comfortable in saying I’ve never been closer to locking this day trading biz down.

This wasn’t a great week profit wise – the amount made wasn’t anything spectacular and going over the week’s market action reveals numerous opportunities missed. Yet, this was one of my best trading weeks of the year, or maybe ever. The bright mark is due to the evolution of my trading system. Years of study and analysis have finally produced system that links many of the single element discoveries I’ve uncovered over time into a workable and more importantly, repeatable method of trading the market.

What separates a successful trader from one who isn’t is typically the discipline in executing a working trading system. There are many traders/investors who trade “from the gut” and use no real consistent system to decide when to enter the market and look for opportunities on the fly. Most traders/investors that fail are in this category. Unless one is truly gifted in reading the market by instinct, the most likely outcome of such trading or investing is losses as the market typically moves in ways that encourage people to do the wrong things. One is tempted to buy when one should be selling, and vice versa. Most people fall into this category of “free trading” which is why so many folks lose money and lends to the academic and mainstream media advice that frequent trading is detrimental to one’s financial health and should be avoided.

One obvious solution to the problem of “gut trading” is developing a working system for investing/trading that takes the emotions out of your decisions and reduces efforts to just following the specified system rules. Of course developing a working and effective trading/investing system is no easy task. System traders fail in this area due to the following reasons:

1) System isn’t complete

A good trading system needs to generate the following information:

a) Market entry signal

b) Profit target

c) Stop loss risk value

The system needs to tell you when to get in the market, what one’s profit sell target is, and when to exit the market at a loss if wrong to keep losses minimized. All three of these parameters need to be defined by the system prior to market entry. If any one of these parameters is missing one is left to use one’s “gut” for the answer, which defeats the purpose and advantage of having a system in the first place. Most “system” traders lose money due to having incomplete systems that lead to making decisions on the fly rather than pre planned.

2) System actually works as planned

Assuming one has a completed system, then one has to make sure the system is a viable one that is consistently profitable over time. Obviously having a system won’t help if it’s generating more losses than profits. A system has to be back tested with both past and current data to validate its ability to work. The best system is one that can work well in markets over the test of time to show the system is reliable and not just reflecting special market behavior that can change and thus render the system ineffective when the market changes. It’s easy to design a system that works great for a particular year of historical data, but those specialized systems often fail once you get past the time frame the system was optimized for.

If you can make it past these hurdles, what’s left is a trading system that gives you the appropriate trading signals and is reliable over time- which leads back to my current system evolution.

My system has now reached a stage that exceeds anything I’ve had to date. It has all the elements needed for consistent profit generation. The only “rusty” part in the equation is myself – I need to master using it effectively. The system isn’t “automatic” in that the computer isn’t generating the signals. I have to manually chart data and interpret the results. That may sound arbitrary, but it’s really not as long as all system trading charting and measurement rules are followed consistently.

The problem is being able to interpret the results and respond to the signals “real time” versus “after market”. This week I found myself “failing the system” in that I let many profitable opportunities get by me because I failed to pinpoint the right entry before the market took off. I then have the watch as the market makes its move without me. =( Yet, this is really good news because it shows my system is showing the right trades to make, as opposed to when a “system fails” and gives you bad trading info.

This week is exciting in that when I was able to interpret the signals in time to enter the market, the result was a profitable trade and the target profit area proved to be accurate. The trades I missed would have been profitable if I was willing to accept a larger risk.

So my objective now moves to being more effective in executing the system so as to not miss the presented market opportunities. The system works by confirmation signals which has served me well in keeping me out of bad trades. My risk has been minimized to the point where I no longer have a problem with using stop-loss orders – my former Achilles heel of trading. If you are familiar with my past history, you’d know how big a leap that is. =)

With stop losses now a standard part of ALL my trades, I can no longer fall into those drama filled roller coaster sessions where my losses and profits in one trade swung wildly in the double digits. This is about as big a change from then as it gets. Keeping the big positive swings while eliminating negative ones was something I strove to find, but couldn’t figure out how until now.

Of course the proof of the pudding will be in trading going forward – but if my back testing and trading this week is a good indicator, my trading should reach new levels of success this year.